Builders are busy, but busy does not mean profitable.
Why are builders going bust in the middle of a boom?
No, that’s not a set-up for a joke, or if it is, I’m not seeing the funny side. Business Insider last week was reporting that the industry is getting set for a ‘biblical’ bust, with as many as 60% of builders already losing money:
From the outside, the construction industry would appear to be making hay while the sun shines.
The hugely popular HomeBuilder program, handing out $25,000 grants to eligible Australians, has helped fuel record demand for building and renovation projects.
The pipeline of work is so significant that many builders have the next 12 months booked out entirely, with prospective clients having to work just to find somebody ready to break ground.
But despite the apparent gravy train, the industry says it is heading off a cliff.
“It is a perfect storm,” Russ Stephens, cofounder of the Association of Professional Builders, told Business Insider Australia. “Excess demand is creating shortages that are destroying any net profit builders were expecting to make.”
Material shortages and skyrocketing prices mean builders are now paying top dollar for timber and other resources, as construction inflation flirts with 25%. Government grants have ironically only “poured fuel on the fire”, as a global timber shortages bites.
At the same time builders are forced to navigate state-wide lockdowns and other pandemic disruptions. Two in five workers are still prohibited from work under tough restrictions implemented in Sydney’s south-west, while $6 billion worth of projects in affected LGAs remain frozen indefinitely.
“Builders are literally busier than they’ve ever been, in a lot of cases running four or five times the workload they would have previously…they’ve never seen anything like it,” Stephens said. “But it is just leading to this nightmare scenario where they are constantly needing to reschedule.”
Stephens estimates as many as three out of every five construction companies is currently making a loss, whether they know it or not.
“Most don’t even realise it, because they sign fixed price contracts ahead of time that don’t account for unforeseen costs. The longer these jobs go on, the bigger the blowout becomes,” he explained.
“A job might be meant to run for seven months but will run for nine. That is weeks of extra scaffolding, fencing and toilets. It is weeks of vehicles, offices, and supervisors while you’re not able to take on new jobs. That is what catches a lot of guys out.”
I’m hearing similar stories on the ground too. Busy does not equate to profitable.
And where does this leave us mid next year?
With the building industry under strain, are we going to be talking about bringing even fewer homes to the market?
Are we going to be talking about falling supply?
Are we going to be talking about falling supply just as stimulus programs, money printing and record low interest rates cause a surge in demand?
And if supply tanks while demand surges, what happens to prices?
You see where I’m going.